Can I use Money From my Roth IRA for College Costs?

Yes you can, but there are many better options. You can withdraw the contributions from your Roth IRA at any time without a penalty or tax bill. And you can withdraw your earnings penalty free for college expenses, although you will have to pay taxes on your earnings.

That tax bill is definitely a drawback. But the biggest downside to tapping the Roth IRA money is that you can't ever put it back, costing you years of tax-free growth. You can only invest up to $4,000 into a Roth IRA in 2007 ($5,000 if you're 50 or older), so there is a big limit on the amount of money you can have in the account for retirement.

Say, for example, you withdrew $15,000 from your Roth IRA at age 45 for college costs. You may or may not have a tax bill, depending on how much money you'd contributed to the account. But you will have the opportunity cost. If you'd kept that money in the account for 20 more years instead and your investments averaged 8 percent per year, you could have amassed nearly $70,000 in tax-free money by the time you retire, rather than the $15,000 you'd take for college costs now.

It's a much better idea to save college money in a 529 college-savings fund instead, which will give you taxfree money for college and let you keep your retirement money in the IRA for your future expenses.